WELLS FARGO
July 7, 2004
Robert E. Feldman
Executive Secretary (Attn: Comments/Legal ESS)
Federal Deposit Insurance Corporation
550 17th Street, Northwest
Washington, D.C. 20429
Re: Definition of "Deposit"; Stored Value Cards
Dear Mr. Feldman:
Wells Fargo & Company ("Wells Fargo") is a diversified financial services
company providing banking, insurance, investments, mortgage, and consumer
finance through over 5,900 banking facilities, the Internet ("wellsfargo.com"),
and other distribution channels throughout North America, including all 50
states, and the international marketplace. Wells Fargo has $397 billion in
assets and 143,000 employees. Wells Fargo is one of the United States'
top-40 largest employers. Wells Fargo ranked fifth in assets and fourth in
market value of its stock at March 31, 2004, among its peers.
I. Background to the Proposed Rule. The Federal Deposit Insurance
Corporation ("FDIC") has published for notice and comment1 a proposed rule
(the "Proposed Rule") that would clarify the meaning of "deposit" as that
term relates to funds at insured depository institutions underlying stored
value cards. The Proposed Rule would add a new section to part 303 of title
12 of the Code of Federal Regulations and would supersede General Counsel's
Opinion No. 8 ("GC8") published by the FDIC on August 2, 1996.2 Since the
issuance of GC8, the banking industry has developed new types of stored
value card systems.
Consequently, the FDIC believes that this new section is necessary to
provide guidance to the industry and the public as to when funds underlying
stored value cards will satisfy the definition of "deposit" at section 3(1)
of the Federal Deposit Insurance Act (the "FDI Act"). The FDIC seeks to
promote accuracy and consistency by insured depository institutions in
reporting "deposits."
Based on the foregoing, Wells Fargo offers the following comments to the
Proposed Rule.
II. Comments.
A. General Comments. The Proposed Rule ostensibly has a narrow
focus: it merely seeks comment to determine if certain funds associated with
a stored value card are "deposits" under the FDI Act. Wells Fargo is
concerned, however, about the apparent failure of the FDIC to recognize the
fallout of its Proposed Rule on other laws or regulations possibly impacting
stored value cards. By providing a more expansive meaning to the term
"deposits" for purposes of the FDI Act (and in effect changing and expanding
the FDIC's current position under GC8), the FDIC may prompt other federal
banking agencies, such as the Board of Governors of the Federal Reserve
System (the "Board") and the Office of the Comptroller of the Currency (the
"OCC"), to evaluate this Proposed Rule and definitively bring stored value
cards into the complex set of federal laws and regulations governing
deposits (and "accounts") in general.
While the FDIC welcomes input on its Proposed Rule with regard to any
other issue that may be related to the meaning under the FDI Act of the term
"deposits" in the context of stored value cards, it fails to recognize the
possible unintended consequence of the issuance of a final rule under the
Proposed Rule on other federal laws and regulations dealing with deposits
and accounts.
Currently, the applicability of the following federal laws and regulations,
among others, to stored value cards is unclear in many circles:
Regulation D3
Regulation E4
Regulation P5
Regulation CC6
Regulation DD7
USA PATRIOT Act8 § 326 and the regulations issued thereunder.9
As you can determine from the above list, a number of federal laws and
regulations may be inadvertently impacted by providing an expansive
definition for the term "deposit" under the FDI Act. By so expanding the
definition, the FDIC may cause stored value cards to become subject to these
other laws and regulations. The Board maybe more willing to apply a number
of the listed regulations to stored value cards due to this development,
notwithstanding the burden of compliance. Due to compliance burdens, banks
may lose their appetite to issue stored value cards. Consequently, these
cards may be issued by other businesses to fill the product vacuum. These
businesses may be less regulated than the banking industry, resulting in
less protection to consumers.
Wells Fargo strongly urges the FDIC to conduct a comprehensive study of
the impact of the Proposed Rule, and in that connection, to confer closely
with the Board and the OCC to identify common regulatory interests prior to
issuing a final rule.) 10 Rather than regulating stored value
cards in a piecemeal fashion with unarticulated goals, Wells Fargo urges the
FDIC to engage in close dialogue with the other banking regulators to
develop a rational plan relative to the federal regulation of stored value
cards. The FDIC and the other banking regulators may wish to identify the
federal interest in regulating stored value cards. If a federal interest is
identified, Wells Fargo encourages the regulators to define the relationship
between specific regulations and that interest. In this manner, an orderly
plan may be developed to address the regulatory management of stored value
cards.
B. The Proposed Rule. With this background, I wish to explore some
of the other issues surfaced in the Proposed Rule. The FDIC specifically
asks the following ten questions. Responses thereto will be provided
thereafter.
1. Should the FDIC promulgate a new section to part 303 to clarify the
meaning of "deposit" as that term relates to funds at insured depository
institutions underlying stored value cards?
As noted above, Wells Fargo has concerns about clarifying the meaning of the
term "deposit" as that term relates to funds at insured depository
institutions underlying stored value cards. Wells Fargo encourages the FDIC
to confer with other bank regulatory agencies to foster uniformity in the
application of that term as it relates to other applicable federal laws and
regulations.) 11
2. If so, should the FDIC adopt the Proposed Rule? Why?
For the reasons outlined above, Wells Fargo does not support the adoption
of the Proposed Rule at this time.
3. In the alternative, should the FDIC adopt some other rule? Under what
circumstances should funds received by an insured depository institution not
be insurable as "deposits"?
For the reasons provided above, Wells Fargo does not indorse the adoption
of the Proposed Rule at this time. A study of this proposal should be
undertaken first. Further, the Proposed Rule does not take into account the
complex variety of stored value cards offered in the marketplace. For
example, many banks offer gift cards. If the gift card is purchased online,
the purchaser is required to provide the name and address of the card
recipient. That name and address would be associated with the purchased card
and the information would be maintained by the issuing bank. Further, the
name of the gift card recipient is embossed on the card. Thus, assuming that
the bank maintains "subaccounts" in a "reserve account," the bank could
conclude that each gift card holder maintains a "deposit" for purposes of
the FDI Act, applying the principles articulated under the Proposed Rule.
However, in addition to purchases online, that same bank could sell gift
cards through its branches. In such purchase transactions, the name and
address of the card recipient is not maintained by the bank. Further, the
gift card recipient's name is not embossed on the card. Under the Proposed
Rule, the value associated with that card would not be viewed as a
"deposit." Thus, for purposes of the terms and conditions of the gift card,
the bank would need to prepare two sets, one showing that the gift card is
FDIC insured and another showing that the card is not so insured. This
result will lead to consumer confusion. In addition, the bank will find this
system difficult to administer for purposes of payment of FDIC assessments
because some cards may be covered by FDIC insurance and other cards of the
same variety may not be so covered.
4. What should be the treatment of funds underlying "payroll cards"?
In a common payroll card service, the employer maintains a funding
account for the cards. On payday, this account is funded, and the cards in
turn are "loaded" with value, the payroll, by the depository institution. As
and when the employee uses the card, the value is deducted therefrom. The
following payday, the card is again loaded with value for use by the
employee cardholder. Unlike a gift card (contemplating a single, set value
at issuance), the payroll card contemplates a continuous banking
relationship, with debits and credits flowing through the card. To the
extent the FDIC adopts any Proposed Rule, the payroll card is more similar
to a "deposit" than other types of cards.
5. Will the proposed rule affect the operation of the deposit limitations
in section 3(d) of the Bank Holding Company Act or section 44(b) of the FDI
Act?
To the extent the Proposed Rule is adopted, indeed it may affect certain
interstate bank acquisitions, due to the expansion of the term "deposits."
6. Should the FDIC adopt the proposed definition of "stored value card"?
Can this definition be improved? What are the differences (if any) between
"stored value cards" and other types of bank cards such as "prepaid cards,"
"debit cards," "check cards" and "payroll cards"?
To the extent any Proposed Rule is adopted, Wells Fargo notes that the
use of the term "stored value card" is more commonly associated historically
with cards with a computer chip embedded therein, similarly to the Mondex
card. The term "prepaid card" is used more generically in the banking
industry to describe the various types of cards in the marketplace (e.g.,
gift card). The term "debit card" is used to describe a mere access device
with no inherent value directly associated with the card (in comparison to a
gift card). The debit card does not independently function on its own, but
is viewed merely as one of many ways to access a deposit account. The term
"check card" is used synonymously with debit card. Finally, the term
"payroll card" is used to denote a subgroup within prepaid cards, a prepaid
card used exclusively for payroll purposes. In sum, I would suggest the use
of the term "prepaid card" in lieu of "stored value card."
To an extent, the multiple offerings of terms ostensibly synonymous with
"stored value cards" illustrate the complexity of the subject at hand. The
FDIC is endeavoring to issue a simple final rule to apply to a complex
product line, with a variety of cards in the marketplace. Further the
public's perception of some cards, such as the gift card, is materially
different than other cards, such as the payroll card. The gift card is not
viewed as a necessity, a source of livelihood; the payroll card, however, is
viewed as a true necessity, similarly to a paycheck. The gift card is
treated more like cash, not an investment; it is merely a payment vehicle.
The Proposed Rule does not take into account these significant differences
in developing the definition of "deposits."
7. Should the FDIC adopt specific disclosure requirements? If so, do the
disclosures provided as examples in the preamble adequately address consumer
confusion about the insurability of funds underlying stored value products?
Are there ways to reduce the costs or burdens associated with providing
disclosures about the insurability of such funds?
As shown by the gift card example detailed above, if the FDIC's Proposed
Rule were adopted, some types of gift cards would be deemed "deposits" and
other types would not be so deemed. This could result in market confusion
among consumers. For example, in advertising gift cards such as those
described above, the issuer would have to provide "Member FDIC" as to some
types, but would be enjoined from using that statement in other instances,
depending on the gift card to be advertised and the content of the
advertisement. If the bank promoted its online gift cards, it would need to
show "Member FDIC"12 but if the bank promoted branch sales of gift cards, it
would be prohibited form using that FDIC membership statement. This is an
unsatisfactory result for the industry.
8. Should the FDIC adopt any special rules governing the insurance
coverage of any "deposits" underlying stored value cards?
Wells Fargo strongly believes that it is premature to issue any special
rule involving insurance coverage for stored value cards. The banking
agencies are encouraged to confer closely and provide consistent, uniform
rules regarding stored value cards as they may impact a number of federal
laws and regulations.
9. Are insured depository institutions offering stored value products or
systems that are not addressed in this notice of proposed rulemaking? Please
explain.
Please see the comments above regarding differing types of cards within
the same product category in response to this question.
10. In the case of a stored value card system in which the cards are
issued by an insured depository institution, and the depository institution
maintains a pooled "reserve account" reflecting its liabilities for all
cards but does not maintain individual accounts or subaccounts reflecting
its liabilities to individual cardholders, how does the institution keep
track of its liabilities? What technology is used? How does the institution
know when and whether to make payments to merchants?
Wells Fargo is puzzled by this inquiry. If a depository institution
maintains a pooled "reserve account" reflecting its liabilities for all
cards but does not maintain individual accounts or subaccounts reflecting
its liabilities to individual cardholders, the depository institution could
not keep track of its liabilities as to individual account cardholders. The
depository institution would not know when and whether to make payments to
merchants.
III. Conclusion. Wells Fargo wishes to express its appreciation
for the opportunity to offer its comments to the Proposed Rule. If you have
any questions to the foregoing, please do not hesitate to contact me.
Sincerely,
Ted Teruo Kitada
Vice President & Senior Counsel
Wells Fargo
633 Folsom Street
San Francisco, CA 94107
1 See 69 FR 20558 (April 16, 2004).
2 See 61 FR 40490 (August 2, 1996).
3 12 CFR Part 204. Is the value of a stored value card a
"deposit" for purposes of Regulation D? 12 CFR § 204.2(a)(1). Regulation D
establishes requirements for depository institutions to hold reserves in the
form of either vault cash or noninterest earning balances held at a Federal
Reserve Bank against transaction accounts that are held by such institutions
on behalf of their customers. If the Board were to address the status of
prepaid cards as "transaction accounts," there is some likelihood that it
would find that prepaid cards, such as gift cards, would be considered
transaction accounts, and thus subject to reserve requirements as such. To
the extent that prepaid cards give rise to insured deposits, they may also
be viewed as giving rise to transaction accounts. For Wells Fargo and most
other banks, the marginal reserve requirements would be 10%. This reserve
requirement would affect the cost of all covered stored value cards and
would need to be reflected in the fees charged to the users, thus increasing
the cost of this product.
4 On May 2, 1996, the Board issued proposed amendments to
Regulation E (12 CFR Part 205). The proposed amendments, among other
amendments, related to the treatment of stored value cards under Regulation
E. These proposed amendments were never adopted and the impact of Regulation
E on stored value cards remains unclear. Is the value associated with stored
value cards an "account" for purposes of Regulation E? Will the adoption of
the Proposed Rule prompt the Board to so determine? 12 CFR § 205.2(b)(1).
Note also that if the Board expands the definition of "deposits," it may
also have an unintended impact on state law. For example, California law
governing debit cards may similarly be expanded, covering new banking
products and services, e.g., gift cards, through the expansion of the term
"deposits" at the federal level. See California Civil Code § 1748.30, et
seq.
5 12 CFR Part 216.
6 12 CFR Part 229.
7 12 CFR Part 230.
8 Pub.L. 107-56.
9 Financial institutions are required to gather specified
information about customers and to verify the identity of customers under
the USA Patriot Act. In addition, financial institutions must establish
risk-based procedures for verifying the identity of each customer to the
extent reasonable and practicable. More, a customer identification program
("CIP") must have procedures in place for opening an account that specify
the identifying information that a financial institution must obtain from
each customer. Further, at a minimum, a financial institution must obtain a
customer's name, date of birth, address, and identification number prior to
opening an account. Is a stored value card an "account" as defined in 31 CFR
103.121(a)(1)? If the FDIC under the Proposed Rule were to determine that a
prepaid card is an "account," for purposes of the USA Patriot Act § 326 CIP
requirements, as to some prepaid products, it would be highly burdensome. It
is simply not feasible for financial institutions to make CIP requirements
apply to recipients of gift cards because they have no interaction with the
recipients other than perhaps the sending of the card.
10 As you know, under 12 USC 1813(1)(5) the FDIC may in
consultation with other financial regulatory agencies define "deposit"
through regulation. Indeed, the FDIC has apparently invited comments from
the Board and the OCC in connection with this proposed rulemaking. Mere
invitation may be inadequate; the FDIC is encouraged to engage the other
financial regulatory agencies in frank and open discussions to achieve
reasonable regulatory harmony relative to the regulatory management of
stored value cards.
11 In this regard, Wells Fargo is puzzled by the timing of the
Proposed Rule. As you know, the FDIC, at 61 FR 40494, solicited comment on
the following: whether and under what circumstances the FDIC should take
regulatory action with respect to findings that the funds underlying stored
value cards or other similar electronic payment systems are deposit
liabilities for purposes of the FDI Act. The FDIC did not act formally
pursuant to this solicitation for comment, despite holding public hearings,
and GC8 remained unchanged. This solicitation was issued by the FDIC on
August 2, 1996. What is prompting the timing of this Proposed Rule now?
12 12 CFR Part 328; 12 CFR § 328.2.